Book Review: Evans, Hagiu & Schmalensee, Invisible Engines: How Software Platforms Drive Innovation and Transform Industries

Abstract

This is a review of the book Invisible Engines: How Software Platforms Drive Innovation and Transform Industries by Evans, Hagiu & Schmalensee.

What makes the PlayStation 3 tick? The Apple iPod? Your BlackBerry? Software, or, more precisely - and much more interestingly - a software platform makes the hardware sing and sits in the middle of a business ecosystem of users, hardware makers and software developers. An invisible engine.

The book centers on software platforms, one example of a two-sided market. These are old markets - newspapers, for example - but many new markets are organized around these software platforms. The core question in two-sided markets is open or closed? That turns importantly (but not necessarily decisively) on the pricing approach of the platform. If the platform is sold at a substantial loss, money has to be made somewhere. It is hard to sell the platform at a loss and open it fully for third-parties. The platform either needs to be bundled with something else - cell phones sold below cost bundled with service plans - or the platform needs to be locked and participants need to be charged for unlocking it.

Multi-sided markets are rich places, and we need to master new rules of the road to navigate there. Our simple one-market understandings will not map easily to this new, richer space. Invisible Engines sets all of this is out in a comprehensive and interesting way. If you are ready to jump in to better understand these markets, Invisible Engines is a very good place to start.